The direction the price of bitcoin and other cryptocurrencies takes likely depends on whether the U.S. Federal Reserve takes a more hawkish approach to raising interest rates as it battles inflation, Imran Lakha, the founder of Options Insights, said Tuesday.
Earlier this month, bitcoin (BTC), the largest cryptocurrency by market capitalization, reached its highest level since August. But bitcoin declined after Friday's personal consumption expenditures (PCE) price index data from the U.S. Commerce Department climbed by an unexpectedly robust 5.4% in January. Economists had predicted a 5% increase.
Bitcoin and other cryptos fell after the report was released. In addition, according to the CME's FedWatch tool, the odds of the U.S. Federal Reserve hiking its benchmark fed funds rate by 50 basis points in March have risen thanks to the PCE index data. That adds to the volatility.
Lakha said on CoinDesk TV’s “First Mover” that volatility declined substantially between November and December in the aftermath of the collapse of major crypto companies including exchange FTX.
It wasn’t until downside volatility subsided that risk appetite came back to the market, he said. That, in turn, led to more purchases of bullish bets (calls) relative to bearish bets (puts) in the options markets. Call options are financial contracts that give the option buyer the right but not the obligation to buy, while puts give the right but not the obligation to sell.
“As we started to see the market could come alive again, and we started to see those big moves of 10%-plus to the upside, all those skews flipped around back towards calls, particularly on bitcoin,” Lakha said.
Now, he said interest in puts has more or less “evaporated after the market made that big bottom last year.”
BTC is currently trading at just above $23,500, but Lakha did not rule out the possibility it “could trade all the way back down to $16,000” before bouncing back to $28,000 or even $30,000. The implied levels of volatility could be cheap enough to make buying puts attractive again, he said.
More broadly, the crypto options market by and large relies on bitcoin staying above the $20,000 to $21,000 threshold to support projects within the industry, Lakha noted.
Retail investors who still own crypto are likely in it for the long haul, he said.
“They’re not really buying it from a tactical perspective. They’re in it, but they’ve seen the bad times,” Lakha said. “They’re going to probably hold on to it.”
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